The Discounted Event of Oil Under $70
Jeffrey C. Borneman | December 1, 2014
On Thanksgiving Day OPEC announced it would not cut production but chose instead to drive a steak through the heart of US producers with the certainty that many cannot survive the lower pricing. It seems OPEC wishes to clear the field of added US competition before allowing the price to rise again. Investors must ask who this is hurting the most and, who is likely to react violently?
The producing nations are in panic mode, specifically, Russia, Venezuela, Mexico and Iran are watching their respective budgets evaporate and not all have reserves to weather this storm. The resulting inflation and destruction of local currencies leaves each desperate as their socialistic state either now teeters on the brink of chaos, or is soon expected to be.
One remedy is to print money for distribution to the masses for essentials like food and heat but that brings only higher inflation and scarcity of goods. In the past, this kind of action has resulted in price controls that history has shown to be counter-productive, generating a black-market for goods and higher prices when the control are lifted.
The perception that the supply of oil is much greater than current demand is misplaced and the lower the price is forced to go, the higher it will rise when allowed. This over-reaction has been seen for forty years but what many investors may be discounting now is the possibility of war.
The US/European sanctions against Russia have already caused a 30 percent drop in the rouble (30 percent rise in Food costs). Since the Thanksgiving Day announcement by OPEC, oil prices have dropped another $6/bbl leaving Russia with ample oil and an eager military. What better way to cut oil supplies than a military conflict?
As reported here many times this year the world's appetite for arms resembles the last three minutes of the movie "Trading Places" in anticipation of a future military engagement. It seems the correlation of dropping oil prices and a rising defense sector has not been lost on everyone.
But is a military conflict avoidable at this juncture? It may be that Russia simply turns off the oil/gas supply to Europe in the dead of winter (Germany can rest at ease in that it has built its own pipelines to the Russian fields, so can cut a separate deal with Russia) to force prices higher - but that speaks only to Russia. The West does not fear military action by either Mexico or Venezuela which leaves Iran.
The tentative hold on power by the Ayatollah's in Iran may be challenged again and remain only a civil war but Iran has recently threatened Israel claiming a million-man army which is eager to march against it.
Investor takeaway: Greenspan recently said that "DEMAND is dead in the water" speaking of not just the US economy. The world's economies were beyond anemic with oil at $90/bbl while US producers were fairing well. The goal of OPEC is clear: kill off both US production (US banks be damned) while simultaneously serving the US and "assist" in crippling the Russian economy. All other countries can fend for themselves attempting to resurrect the necessary $100/bbl, and their budgets.
An invitation to war, however, seems to be either a discounted event or a goal - either way, OPEC wins.
If you want to know more about how the MDEF™ Investing strategy is positioned in this, or other geopolitical possibilities, please contact us directly.